Equitable's new disgrace

FURTHER evidence of widespread mis-selling by Equitable Life salesmen in the Nineties has been uncovered by Financial Mail on Sunday.

It raises new concerns over the role of the regulators in ensuring that thousands of customers of the mutual received proper advice in the years leading up to the current crisis. It also highlights the lack of effective compliance within Equitable.

Clive Hammond, a former Equitable salesman, says that risky income drawdown schemes - a way to release income from pensions without taking an annuity and keeping the pension fund invested - were sold in the late Nineties primarily because they generated more sales 'bonuses' than some competing products.

Hammond, 48, now runs Medical & Professional, a firm of independent financial advisers based in Salisbury, Wiltshire. He says he is not running a vendetta against Equitable and left the insurer on good terms. His departure came just as the salesforce were given the new drawdown plan.

He says income drawdown sales were made even though the product was often inappropriate and too risky for people in their sixties. In many instances, customers were persuaded to take drawdown and forgo their right to lucrative guaranteed pension annuities, which they could have bought with their pension funds.

A better product was availableEquitable has already admitted it has put aside £200m to cover the costs of potential income drawdown mis-selling, though last week a spokesman said it was unlikely that final compensation would be anywhere near this figure.

What makes Equitable's selling of drawdown more damning, says Hammond, is that a better pension income-generating product was available from Equitable - its phased retirement or 'staggered vesting' scheme. But most clients were not made aware of it.

Phased retirement plans allow people to take an income by using a part of a pension fund every year to release tax-free cash and purchase an annuity. At 75, any remaining fund is then used to buy a final annuity, as required by law.

Phased retirement plans are more flexible than drawdowns because investors can directly control the amount of income they require. They also offer better tax breaks if the holder dies before the plan expires at age 75. Under phased retirement, any fund proceeds can be passed on to a spouse or other dependant free of tax. This is in contrast to income drawdown, where the fund is taxed at 35%.

A better bonus for the salesmanHammond says: 'The regulator requires a life office to sell the most appropriate product from its stable. But in Equitable's case, this did not happen.

'Equitable had a phased retirement product, but did not readily inform clients of its existence. This is not surprising as Equitable's drawdown plan generated just over nine times more in bonuses for the salesman.'

Assuming a pension fund of £100,000, Hammond says that if a customer took the maximum tax-free cash of £25,000, the £75,000 committed to drawdown would generate immediate bonuses for the Equitable salesman. They might also earn commission on the reinvestment of the £25,000.

But under phased retirement, the release of £20,000 in year one - £5,000 in tax-free cash and £15,000 to purchase an annuity - would earn the salesman a bonus only on the £15,000.

Hammond says: 'When you consider the superior tax implications for most clients if a phased plan was used, you have to wonder who really benefited from the drawdown plan? It certainly wasn't the client.

'I recently dealt with a lady who had a £25,000 pension and was advised by Equitable to take drawdown. She takes minimum income,which she really does not need.

'If a phased plan had been used, the entire fund could have been left to her grandchildren if she died before age 75 and she could access the fund at any time for ad hoc income.'

An Equitable spokesman said the job of salesmen had always been 'to recommend the most appropriate products' and 'income drawdown had been appropriate in many cases'.

He declined to confirm the ratio of income drawdown to phased retirement sales. But he confirmed that Equitable salesmen earned more initially for income drawdown sales. With phased retirement, salesmen's 'credits' were generated over a longer period.